LONDON, Sept 19 (Askume) – European banks may not be able to provide adequate provisions for real estate loan defaults if severe stress leads to a rapid rise in problem loans, a Moody’s Ratings report said on Thursday, but decision-making banks may have enough capital buffers to cope.
While central bank interest rate cuts have begun to ease some of the pressure, property owners in the area are still under pressure due to falling house prices and rising borrowing costs , which have increased the risk that bank loans will not be repaid.
Moody’s modelled a significant deterioration in the quality of commercial real estate loans for 21 high-risk European banks, based on pressures on banks following the 2008 global financial crisis.
The banks involved are those with the highest commercial real estate exposure relative to their capital strength. More than half of the lenders are German, most of them real estate specialists, with the remainder coming from countries such as Sweden, Austria and Denmark.
Moody’s uses a loan loss provision level of 40%, which is the average level reported by large European banks over the past five years. But it pointed out that the actual average in the first quarter of this year was lower at 33.5%, indicating that problem loans were growing faster than provisions.
“Although a shift to higher-quality assets may justify lower coverage, we believe the risk that banks will underprovision is increasing,” Moody’s said in the report.
The comments echo warnings from the European Central Bank last month , which found euro zone banks were too optimistic about commercial real estate valuations and may be hiding deteriorating loans.
Moody’s found that potential stress was highest for banks with greater exposure to U.S. and U.K. offices and lowest for banks that lent to housing projects, but all banks surveyed would remain above minimum capital thresholds, Moody’s said.
“Our tests necessarily involve simplifying assumptions, but they indicate that minimum regulatory capital levels would not be breached under the simulated scenarios,” Moody’s said.
